Overview
Go to CNBC, the Globe and Mail, Business Insider, or any one of the many hundreds of financial news outlets. Throughout 2020 you probably would have seen the following headlines:
“Markets reach record lows”
“Gains eliminated as coronavirus cases surge”
“Fed holds interest rates steady as coronavirus recovery expected to occur in two to three years”
“Stocks surge on positive coronavirus vaccine trial data”
“Upbeat markets after better than expected jobs report”
There is never going to be a shortage of news about the short-term movement of the markets. Everyday, there will always be information to report, regardless of how important or trivial it may be.
All it takes is the slightest sign of trouble to send markets tumbling, and only a sliver of hope for markets to surge.
As an investor, especially a young investor, ask yourself this: is all of this news relevant to me?
I’m not saying you should drop off the grid and completely ignore what is going on with financial markets, every investor needs to stay informed of current events to some degree. But do you really need to spend so much time and energy understanding the daily minutiae of the markets?
Unless you’re the CEO of a major investment bank or an institutional investor, chances are short-term market activity will have a very minimal impact on your portfolio.
Some Tough Decisions to Make
If you consistently find yourself stressing over the short-term frenzy of financial markets, you have two options to consider going forward:
- Leave your investing to someone else
- Save yourself from future stress and exit the investing world indefinitely
Let me make this unequivocally clear: not everyone is meant to be an investor, and not everyone has the skills and temperament needed to manage their own portfolios.
I am not saying this to sound condescending, but rather to do you a favour by being forthcoming with reality. I previously believed that my calling was to be a medical doctor, but after starting my engineering degree and becoming increasingly enticed with investing I quickly realized medicine was not for me, and I was completely fine with that.
Individuals need to be honest with themselves before starting to invest, and honestly ask themselves if they are mentally and emotionally prepared to stand against the tide and hold your ground when needed, even when there is overwhelming pressure telling you otherwise.
An investor does not need to be the smartest person in the room. As Warren Buffett once said, investing is not an activity where the investor with a 160 IQ is superior to the investor with a 130 IQ. The superior investor is the one who maintains stone-cold rationality.
Part of any investor’s career involves having to live with the day-to-day irrationality of financial markets. One day all stocks across the board could be up, and the next day the only colour you see is red. This is an unavoidable reality every investor must deal with.
Some Market Upheavals I Experienced and How I Responded
Some recent market events I have experienced were:
- August 2019 Yield Curve Inversion
- September – December 2019 U.S. – China Trade War Developments
- COVID-19 pandemic & March 2020 Crash
What did I do during these events? I figured out what was going on, turned off the news, then continued with my usual investment activities: continue learning about different financial & investing topics, read through the annual reports of enterprises that interest me, and periodically check on my portfolio.
I was able to keep my cool during these moments and not resort to panic because of the following:
- I have unwavering confidence in my analysis that the investments I own are solid and remain inherently strong.
- Because of my investment goals, some short-term frenzy is nothing compared to the amount of time I plan to hold my investments.
- Even if markets are down, they won’t stay down forever. Time and time again history has proven that.
Why I Am Unfazed
I pointed out in the preceding section the three reasons why I don’t panic during short-term market frenzies. I will expand on those reasons below.
My first point, unwavering confidence of my analysis. The reason why I believe so many investors are quick to sell at the first sign of trouble is because they are not confident in their analysis – they either performed a cursory analysis or did not perform any at all.
If an investor truly has performed thorough analysis before making an investment, what is there to fear? If all it takes for a company to experience a precipitous decline is for a single risk to materialize, that company should not have been assigned any investment merit to begin with.
If you don’t believe such a business exists, you don’t need to look very far. Canada’s Big 5 banks have all existed since the early to mid 19th century and continue to thrive today. All 5 have experienced two world wars, the Great Depression, and several other financial crises throughout their lifetimes. Regardless, the Big 5 weathered any storm they encountered while continuing to pay dividends, a streak they have not broken for more than 100 years.
Next, I mentioned that because of my investment goal, some short-term mayhem is nothing compared to my time frame. In a previous article, I shared that my investment time frame is at least 75 years. Compared to that very long holding period, a few months of market upheaval are meaningless in the grand scheme of things.
It can be argued that investors who lack any sort of clear investing goals are more susceptible to short-term market panic because they do not have a clear timeline for how long they plan to hold certain investments, among many other things.
As for my third point, I previously wrote about the importance of studying previous financial events. No recession or down market stays that way forever – history has proven this time and time again. The Great Depression came to an end, the 2007-2008 Global Financial Crisis eventually subsided, and the market effects of the COVID-19 pandemic will also one day come to pass.
Keep Your Cool, Always
Next time you come across market headlines heralding a plethora of short-term market activity or otherwise bad news, ask yourself if that information will:
- Affect the quality of the investments you currently own
- Compromise your investment goals
- Compromise the investment paradigm you adhere to
If you find yourself answering yes to any of these questions, don’t immediately panic. Take a breath, sit down, and calmly understand what next steps need to be taken. If you need to sell, reorganize your portfolio, or do some other tweaks, make sure these actions are performed as calmy and rationally as possible. Only perform certain actions if they have been justified by facts, not untethered emotions.
It’s easy to succumb to panic, but it’s just as easy to stop, breathe, clear your mind, and approach things with a cool head.
If you answered no to all the above questions, what need is there to worry? Markets will always act erratically in the short-term from time to time, but that does not mean you need to get swept up in all the panic as well.
The defining characteristic of a world-class investor is their ability to keep their emotions in check and maintain stone-cold rationality at all times. Investors who regularly let their emotions control their decision-making and do not maintain their rationality are the ones who ultimately lose lots of money and end up burning out.
As long as you are confident in your analysis, stick to your investment goals, keep your emotions separate from your decision-making, and stay as rational as possible, then there is no need to worry about short-term market activity.
Wrapping Up
There will always be short-term vicissitudes in financial markets, but not every development will impact your portfolio.
So many investors stress over short-term problems that are either (a) way beyond their control or (b) are so unrelated to their portfolios that it doesn’t warrant any attention whatsoever.
Trade wars, election results, virus cases, real estate bubbles, whatever: the next time the financial media bombards you with this sort of news ask yourself if any of this information will directly impact your portfolio. Chances are many of these developments won’t.
Once an investor understands short-term market activity is simply noise that can mostly be ignored, they set themselves up for a lifetime of prudent decisions, rational analysis, and an overall pleasant investing experience.
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